What is California's AB 5? The bill could make gig economy workers like Uber drivers employees
Updated: Sep 16, 2019
A battle over the future of the gig economy is being fought in the California legislature this week, as lawmakers consider a controversial bill that would require companies — including tech titans like Uber and Lyft — to bring their independent contractors on board as employees.
AB 5, legislation that would codify a landmark ruling issued by the state Supreme Court last year, would apply a definitive “ABC test” to determine which workers can be classified as independent contractors and would put the burden of proof on employers.
What's at stake for workers, businesses
If enacted, proponents of the bill say it will secure labor protections like minimum wage, overtime and workers compensation for more than a million Californians, bring in more tax revenues from businesses, and enable unionization efforts spreading through the gig industry.
Independent contractors don’t qualify for protections under the Fair Labor Standards Act, Americans with Disabilities Act, or the Civil Rights Act. They also must pay the entire portion of payroll taxes, lowering their take-home wages. That’s why they are so much cheaper for companies to hire. The National Employment Law Project estimates businesses save roughly 30% in costs when they work with independent contractors instead of hiring employees.
The bill is expected to set a precedent in a national fight being waged by gig workers across the country — and it could cost companies millions, potentially disrupting the business models of on-demand app-based services built on contract labor.
What are the chances it is signed into law?
The legislation is expected to land on Gov. Gavin Newsom’s desk before the end of the legislative session this month, but he’s already given it the thumbs up. In an op-ed published in the Sacramento Bee on Labor Day, Newsom called on lawmakers to pass the bill.
“Our economy has stopped working for working people,” he wrote, emphasizing that misclassification fuels income inequality.
“Workers lose basic protections like the minimum wage, paid sick days and health insurance benefits. Employers shirk responsibility to safety net programs like workers’ compensation and unemployment insurance. Taxpayers are left to foot the bill.”
The ABCs of the gig economy bill
It all started with a lawsuit. Delivery drivers for a company called Dynamex Operations West had been seeking employment status for over a decade by the time their class-action case was decided in the Supreme Court last year. Their win came with a new legal definition for workers in California — and formed the basis for what will likely soon be law.
The “ABC test” that came out of the ruling allows for the classification of independent contractors only if employers can verify that:
(A) that the worker is free from the control and direction of the hirer in connection with the performance of the work, both under the contract for the performance of such work
(B) that the worker performs work that is outside the usual course of the hiring entity’s business
(C) that the worker is customarily engaged in an independently established trade, occupation, or business of the same nature as the work performed for the hiring entity.
The state is hoping that by writing the decision into law, loopholes that enabled years of misclassification — and an estimated $7 billion in losses of payroll tax revenue — will be closed. It also adds nuance to the sweeping court decision, offering exemptions for certain industries.
Insurance brokers, doctors, dentists, lawyers, architects, engineers, private investigators, accountants, investment agents, salespeople, commercial fishermen, and real estate agents, are among those that made the list. Freelance media-makers, including journalists, also were granted exemptions, but are limited to contributing 35 pieces a year.
Lobbying efforts are still underway to increase the exemptions before the bill is signed. Industries that have often faced misclassification lawsuits and lacked employee protections, including trucking and newspaper carriers, are unlikely to be given exemptions despite hard-fought lobbying efforts.
Who's against the gig economy bill?
Several businesses — including Uber and Lyft, which rely on non-employed drivers for their core business — are fighting hard to secure exemptions before the bill becomes law. In an attempt to compromise, the companies have put together a package that will give their workers more rights, benefits, and better pay if they don't have to abide by the new law.
The rideshare companies have joined with food deliver app DoorDash and are also preparing to take the issue to voters, financing a $90 million push for a proposition on the next ballot.
“We are working on a solution that provides drivers with strong protections that include an earnings guarantee, a system of worker-directed portable benefits, and first-of-its-kind industry-wide sectoral bargaining, without jeopardizing the flexibility drivers tell us they value so much," Lyft spokesperson Adrian Durbin said in a statement. "We remain focused on reaching a deal, and are confident about bringing this issue to the voters if necessary.”
While the apps have gotten the most attention, they are far from the only industry that will be affected. From newspapers to movie makers, truck driving to adult entertainment, a wide range of work would be reclassified under the new law.
Lyft and Uber have been the loudest opponents to the bill but others are also pushing back.
The California Chamber of Commerce launched the “I’m Independent Coalition” after the Dynamex ruling, with support from a long list of businesses, trade associations, and city chambers. The group has championed legislation that clarifies the sweeping Supreme Court decision but called for more exemptions for contractors who want to remain independent.
Arguing that 2 million workers in the state chose to work independently due to “flexibility, quality of life, more control over their work, more economic security, extra money on the side, or simply because they enjoy it,” and demanded the legislature to “protect [their] freedom to work independently.”
The group cited surveys done by Intuit in 2016, that found more than 90% of polled on-demand workers prefer the flexibility and personal control they have, made possible by independent contract jobs.
Still, most of the battles have been fought by companies concerned about their bottom line. Uber said as much in its SEC-filing, warning investors of how employing its workforce would affect its aim of achieving profitability.
Along with the costs associated with fighting the measures and settling suits filed by drivers around the world, the company wrote in its S-1 filing with Securities and Exchange Commission this year that if it were required to hire its drivers, it “would incur significant additional expenses for compensating Drivers, potentially including expenses associated with the application of wage and hour laws (including minimum wage, overtime, and meal and rest period requirements), employee benefits, Social Security contributions, taxes, and penalties. Further, any such reclassification would require us to fundamentally change our business model, and consequently have an adverse effect on our business and financial condition.”
The bill is already making waves across the U.S.
Seen as both an existential threat to gig-dependent tech companies and an opportunity for the labor movement to win ground, Democratic presidential hopefuls have begun to weigh in. Sen. Elizabeth Warren of Massachusetts lead the pack with an op-ed comparing misclassification to worker abuses of the past.
“From children working in coal mines to women locked inside dangerous factories to migrant farmworkers laboring under inhumane conditions, American history is full of shameful examples where powerful industries exploited workers in pursuit of greater profits,” she wrote. “Their methods have changed over the years, but companies’ drive to cut costs and boost profits at the expense of workers’ wellbeing has not. In many industries today, it takes the form of worker misclassification.”
Vermont Sen. Bernie Sanders, who pushed for similar protections for workers at the federal level, has also endorsed the bill. South Bend, Ind., Mayor Pete Buttigieg put face time in while he was on the West Coast, joining Uber and Lyft drivers protesting in San Francisco and California Sen. Kamala Harris also has signaled support.
It’s a sign that California could be the leader.
Backed by labor unions — especially those hoping to organize the tech workers who can’t unionize as non-employees — the measure is also supported by a coalition of academics, including law professors, economists, political scientists and historians, from across the country who penned a letter to the governor and legislative leaders in August, pushing them to pass AB 5.
“California is poised to lead the country—indeed, to lead the world—with the strongest law on record to protect workers from misclassification,” they wrote. “We urge you to fully support codifying the Dynamex ABC test as a rule of general application, without an ad hoc carve-out for gig workers.”
What will happen next?
Even if it does pass, sweeping changes that impact a variety of industries will need time to be implemented, especially with the flurry of lawsuits that will likely be filed by companies that don't want to comply. Uber CEO Dara Khosrowshahi said as much during a recent earnings call.
“If AB 5 passes, it’ll simply be a qualification of existing law," he said. "It doesn’t immediately transform drivers into employees."
Part of that fight will be staged through voters, as the California Labor Federation has vowed to go head-to-head against the tech companies financing the proposed ballot measure.
The organization, which represents 1,200 unions, wrote on its website that it will "meet the gig companies’ absurd political spending with a vigorous worker-led campaign to defeat this measure to ensure working people have the basic job protections and the right to organize a union they deserve under the law."
Aside from the politics, there's still a lot of uncertainty about what kind of impact the new law would have if enacted.
Harry Campbell, an engineer-turned-driver who runs The Rideshare Guy blog wrote in June that he thinks the law will have both pros and cons for Lyft and Uber workers. The added benefits of being employed are obvious, but they could come with other consequences, including limited work hours and restrictions on which apps drivers can use.
"There are a lot of unknowns," he wrote. "Would we lose some flexibility? Probably. It doesn’t take a rocket scientist to realize that if drivers were guaranteed a minimum wage, you wouldn’t be able to just flip the app on anytime from 10 am-3 pm because there would be way too many drivers and not enough rides."